Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Aaon Inc (NASDAQ:AAON)
Q1 2021 Earnings Call
May 6, 2021, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Welcome to the AAON Inc. First Quarter Sales and Earnings Call. There will be a question-and-answer period after the management's brief presentation. This call will last approximately 45 minutes to an hour and I would now like to turn the meeting over to Mr. Gary Fields. Please go ahead, Mr. Fields.

Gary Fields -- President & Chief Executive Officer

Good afternoon and welcome to our Q1, '21 earnings announcements.

I'd like to read a forward-looking disclaimer to begin with. To the extent, any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year. Such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.

Joining me on the call today. Norm Asbjornson, our Executive Chairman, Rebecca Thompson, our newly promoted, Chief Financial Officer. Rebecca is going to open by reviewing our financial performance.

Rebecca, floor is yours.

Rebecca Thompson -- Chief Accounting Officer & Treasurer

Thank you, Gary. I'd like to begin by discussing the comparative results for the three months ended March 31, 2021 versus March 31, 2020. Net sales declined 15.8% to $158 million from $137.5 million. The first quarter of 2020 benefited from a high backlog that allowed the company to run at full capacity and set all-time record highs for net sales in the first quarter. The order intake began to slow in late 2020 and the company intentionally slowed production to keep its backlog at a healthy level. The year-over-year decline in net sales is primarily due to lost production days in January for planned maintenance and in February, due to impacts of bad weather. Our gross profit decreased 22.8% to $33.2 million from $42.9 million. As a percentage of sales, gross profit was 28.6% in the quarter just ended compared to 31% in the first quarter of 2020. The production days we lost in the quarter resulted in an unfavorable labor and overhead efficiencies, including the company's ability to absorb certain fixed cost increase in our gross profit. Selling, general, and administrative expenses decreased 3% to $14.7 million from $15.2 million in 2020. As a percentage of sales, SG&A increased to 12.7% of total sales in the quarter just ended from 11.1% in the first quarter of 2020.

The increase in SG&A as a percent of sales was due to an increase in insurance premiums and salaries and benefits. Income from operations decreased 33.6% to $18.5 million or 15.9% of sales from $27.8 million or 20.2% of sales in 2020. Our effective tax rate decreased to 11.4% from 21.5%. The unusually low tax rate was mainly related to a $1.8 million increase in our excess tax benefits associated with stock awards. The company's estimated annual 2021 effective tax rate, excluding discrete events, is expected to be approximately 27%. Net income decreased to $16.4 million or 14.1% sales compared to $21.9 million or 15.9% sales in the first quarter of 2020. Diluted earnings per share decreased by 26.8% to $0.30 per share from $0.41 per share.

Turning to the balance sheet, you'll see that we had a working capital balance of $178.7 million versus $162 million at December 31, 2019. Our unrestricted cash totaled $97 million at March 31, 2021. Our current is approximately 3.7 to 1. Our capital expenditures were $16.4 million for the quarter. We expect capital expenditures for the year to be approximately $70.7 million. The company has stock repurchases of $5.2 million during the 3 months ended March 31, 2021. Shareholders' equity per diluted share is $6.93 at March 31, 2021 compared to $6.67 at December 31, 2020.

I'd now like to turn the call back over to our CEO and President, Gary Fields.

Gary Fields -- President & Chief Executive Officer

Good afternoon. Overall, we're happy with the first quarter performance. It was in line with our expectations. Unsurprisingly, sales were down year-over-year. But compared to fourth quarter, if you'll recall, when we had those announcements, I said that a good benchmark accomplishment for Q1 would be if we essentially duplicated Q4. Because I had good visual of the backlog. So, we slowed the production down, probably the intentional portion was the longer shutdown around the holidays and that allowed us to get ahead on some pretty heavy-duty maintenance, but then we had to adverse weather. So, we ended up a little bit lower in revenue than what we actually thought we were going to do as a result of that weather shutdown too, but after the moderation in bookings in the end of 2020, the bookings began to pick up sharply right after the first of the year.

Now, we did have a price increase that went into effect on January 11, 2021. So that's not unusual for January or any time to pick up bookings cadence right ahead of a price increase, but the fact that the bookings increase stayed very robust throughout the quarter told me that it was genuine growth in bookings. Normally, the pull-forward from a price increase runs in the range of 30 to 45 days, and then it begins to kind of stabilize and see what the actual run rate is. So, I think, our bookings were up around 21% to 22% in Q1 of '21 versus Q1 of 20. That Q1 of 20, bear in mind was largely unaffected by coronavirus. Because the virus didn't really start slowing anything down until Q2. So, this is a very strong indicator of our bookings performance for '21 and that booking performance has continued on that same trajectory up until right now. I mean it's still continues. It hasn't slowed down at all. So, they are strengthening a fair amount.

We're looking at backlog, on May 1st, 2021, it was $104.5 million. You got to recognize that we've got production turned up pretty good too. We're maintaining a really nice balance here between production levels and backlog levels. Going back a few quarters, I said that the ideal backlog should be when we got our production capacity where we had planned it should be real close to $100 million. So, we're running along at just almost exactly the perfect backlog right now.

Replacement business at this time of year is always stronger than new construction. This year is taking shape same as what we expected. Lots to K through 12 schools are in the books right now being built. But on the new construction side, we're seeing a fair amount with data centers, large air condition warehouses for online retailers. Some of that stuff is really picked up and there is quite strong. So, the growth business, agricultural growth. Some of you might know, it is the cannabis business. It's what primarily what it is. Additional states approved some measure of cannabis legalization back in the fall and responding to that were more of these facilities being built in more states and we are one of the companies that provided best practice HVAC equipment for that industry several years ago now and we maintain a very strong position in that industry.

So Architectural Billing Index had several months. I don't have in front of me, but it's somewhere around 10 months that we're below the benchmark of 50, which said that they had lower architecture billings. This normally translates into a slowdown in business for us. While we're not seeing it quite like the historic. Because what causes billings to go down was not a normal activity. It was a very abnormal activity. What we have witnessed for certain and we've just concluded a sales conference with our leading representatives last week and validated this further. Numerous projects in early to mid-2020 were put on pause, various reasons, some they couldn't man the projects because of coronavirus, some states wouldn't allow them to work, some they just we're uncertain what the outcome was and they had the opportunity to hit pause.

While those projects were designed, the plans were on the shelf ready to be utilized. They have hit the go button on numerous of those projects and that doesn't necessarily generate an architectural billing. So, this architectural billing index doesn't have the exact correlation that it does in normal times. So, we've seen a lot of projects come off of the storage shelf, put into the market, and these have resulted in orders for us. I do believe, at some point in time, that we're going to see a bit of dip because of the architectural billing index, because they just didn't bill work for a while. It has to show up, but it's not showing up in its traditional down mode for the indicator. Architectural billing index has turned back positive the last month or two for sure. It's been above the benchmark of 50. I think this last one was when they close to 53, 52.8 or something like that. I think it was -- so, it's beginning to strengthen.

Our sales channel partners tell us that their pipeline is very robust and that the orders coming to us are going to be steady. We had anticipated maybe orders would peak sometime in Q2 going into Q3, causing Q4 to slow down as we've traditionally seen with our seasonality. We're not certain at this point in time if that's going to happen. Because the pipeline seems to be pretty robust at this point now. That could change at any moment. But this is what we're looking at today.

Looking at our various business segments, surprisingly, we've had some commercial and retail business that I frankly wasn't expecting. Grocery stores continue to build and update and remodel. Convenient stores continue to do the same thing. Office buildings have been a bit soft, although non-existent, medical and healthcare are definitely picking up. Go back early in the Coronavirus occurrence when it was identified that the rural communities, the outlying communities, were very deficient in their capacity for healthcare. A lot of those facilities have been mothballed or the region expanded may had not yet supported them with localized healthcare. We're seeing a very nice influx of business due to that.

Again, I had some customers in here just in the last day or two that we're focused on healthcare. These were end-user owners with their engineers and our sales channel partner representatives here and they're our West Coast operation and they were planning a lot of facilities and they were here to look at our equipment and they left here with a very favorable impression. I expect that to turn into something good for us.

In the education market, I already spoke to K to 12, is very, very strong. One of the things that we're seeing, there has been some bond issues recently in various regions, as recently as a year ago, some of these were challenging to get past another passing easily and one of the key things in these bond issues is updating the HVAC systems to be in accordance with best practices for virus mitigation indoor air quality. These are things that are very favorable for with the equipment that we manufacture.

Manufacturing has really not had any material change to it. We still continue to supply equipment for manufacturers. It might be slightly curtailed or curved but not much. On the lodging front, we're seeing some replacement business, but not so much new business. Not seeing a lot of new hotels built, a few here and there, but mostly we're seeing people pull forward on updating their HVAC systems. Again, they want to put these virus mitigation procedures into the units and the best way to do that oftentimes is update the unit.

That's kind of where we're at with our markets right now. Again, just to recap, grow facilities and large warehouse air conditioning, both of these are stronger than what we've seen in the recent past. Raw materials and component prices are definitely on the rise. We got a price increase in effect January 11. We have another one that goes into effect June 1. Each one of these was 4% across the board and these were put in place to manage our expected material and component price increases and we believe that we are in a favorable position to offset all of those material price increases.

We continue to improve productivity here in the Tulsa facility. We're operating now at about the most efficient, turning metal into profit that we've ever done. Very proud of this team. They've worked very hard and we share the team here that accomplished that with our other primary manufacturing facility in Longview. We got the new facility up and going about 60 days ago now. That's when we manufactured the first products in that and it has quite a ways to go to reach the efficiency that we believe were capable of, but the same team that helped identify all the practices that enabled this wonderful efficiency we have here in Tulsa, they go down on a weekly basis. In fact, there's a group of them there today and they go down on a weekly basis, a whole group of them does, and spend one day and help that team down there and we've seen very nice results from that and we look forward to continuous improvement throughout '21, in both revenue production and efficiency.

Both of those are going to improve in that facility throughout '21. I don't see us reaching the levels that we believe were capable of prior to the end of the year. Our Sales Rep Network, I mentioned earlier, we had a somewhat of a sales retreat last week, brought in a lot of the key sales channel leaders and the overall tenor of the meeting was very upbeat. They had very positive attitudes about the way we were doing business, the way we were supporting them, are shorter lead times. We very much appreciated. Obviously, we've seen an improvement in quality over the past few years. You see that the warranty expense has continued to go down and stabilize. It's been very stable for about a year and a half now. They recognize that that makes their jobs lot easier.

Bringing the lead times down to very attractive levels has afforded them opportunities that they wouldn't have otherwise and the overall tenor from the sales channel is very good and that's why I temper that going into this year, our expectations with Q1 would mirror Q4 of 20, but then that Bell's curve of Q2 and Q3 being up and Q4, maybe being back down a bit in relative terms. What they're lead me to believe is, if we do have a lower demand in Q4 in production, it might not be substantially as we first anticipated. It's a little stronger out there than maybe what we anticipated back in the fall, when we were doing our annual planning.

The water source heat pump business is pretty stagnant for us right now. The product and we've talked about this before, but the product that we have is very favorable for new construction. We continue to have a steady demand for that product. But it is not a good fit for retrofit when there is a couple of manufacturers that had a very dominant position for 20 plus years and their units are the ones that are wearing out, needing to be replaced. Our unit is not a wonderful direct replacement for it just due to its configuration. So we have designed a complete line of units to be 100% backward compatible with this huge installed base and we are optimizing that. It's probably well along toward completion and introduction. It will occur later this year and we believe that that will allow us to regain our growth position with water source heat pumps. Because the dominating factor of the water source heat pump market today is replacement, not new construction.

Our capex investments remain as we have talked about before, just a bit over $70 million. I believe that around $40 million of that $70 million is for accretive capacity and $30 million of that is for replacement, maintenance, and worn out things. I'm looking across the street today and beautiful things occurring. We have a crane over there, setting new AAON units on our eastside factory to be ahead of the curve and keep our employees well-conditioned and these all have the latest indoor air quality virus mitigation procedures installed in them.

Indoor air quality and virus mitigation procedures remain a topic of conversation with every customer that comes in contact with us today. I think that when [indecipherable] published their best practices guidelines last summer and revised it two or three times with little tweaks, that everyone took notice of that. So, all replacement and all new construction, they're at least giving it the credence of thinking what should we be doing and it looks to me like a great many of these projects that they are including some form, if not all forms, of the best practices for virus mitigation.

We're optimistic heading into the second quarter. We're in the second quarter now. Things are running smoothly. Orders are coming in the door nicely and we believe that we will be in our best ratios for absorption of overhead and where we had said we want to manage our gross profit between 28% and 32%, in Q1, we were just slightly above that 28%. I believe as we go through to second quarter here with better revenue, better production out the door, that we'll have better absorption and therefore we will be closer to that bullseye target of 30% or so.

With that I'm going to open up the call to any questions.

Questions and Answers:

Operator

Thank you, presenters. [Operator Instructions] We have our first question from Brent Thielman from D.A. Davidson. Your line is open.

Brent Tillman -- D.A. Davidson -- Analyst

Hey, good afternoon. Hey, Gary, you talked about the increase in the replacement orders and I was curious if you had any sense of how much of that could be related to some of the stuff you're just talking about the air upgrade, circulation, medical related upgrades for system? Is there any way to tell from that?

Gary Fields -- President & Chief Executive Officer

It's a little difficult to give a real highly qualified definitive number on that. You can have a sense of what's going on, Brent, and it looks to me like we're up 20% on bookings over last year and I would say that a significant amount of that is attributable to the indoor air quality, the virus mitigation procedures. Because last year, Q1 was a very nice bookings quarter, very much within our what we had anticipated and it had the normal replacement business for school. For this year to be up this substantially in bookings, it really feels like a big part of that accretive bookings number is related to the virus mitigation procedures and people getting on top of that.

Brent Tillman -- D.A. Davidson -- Analyst

Okay. Gary, I'm assuming this equipment has more bells and whistles to it in order to meet those sorts of standards. Is there a way for us to think about the higher average value per unit for something like that to address the sort of things that [indecipherable] is talking about?

Gary Fields -- President & Chief Executive Officer

Well, that's the wonderful thing about the AAON unit, these things are very inexpensive for us to add our units. What it has done is our units themselves are much better value to address these things. So, we don't have to do very much at all. So, for instance, our units are double-weld steel panel. The interior panel of our unit is solid steel and it's washable. So, you don't get bacteria and viruses attaching to a fiber glass line or like the majority of our competitors have. They don't have a steel liner and that's inherent in our units from 2 tons, all the way up to 240 tons.

The next thing is that our fan will overcome the additional pressure drop of these higher rated filters. While the difference say MERV-8 filter, which has been the most common filter used up until now, and MERV-13 filter, which is pretty much what everybody is wanted to do, the cost that filter is insignificant. Maybe in the 2-ton unit, it's $20 and in 100-ton unit, maybe it's $300. So it's not significant, but what is significant is that our unit was designed in it's fundamental design to overcome that additional pressure drop in a very efficient manner.

So, we can put these filters in. We can have this nice clean interior that doesn't collect bacteria and virus and allow it to accumulate. They can clean these units easily. Then when you start putting infrared lights in there, again you're talking in 2 ton to 10 unit, which are lot of these school units. That's their range. You're talking $125 on a several dollars unit. Now the one thing that does cost a little money and we're not seeing a lot of it, but we're seeing a little bit is the bipolar ionization. That seems to be a small percentage of our customers who want the better filtration. They want the lights and then they want the bipolar. It's a very small percentage that want to bipolar.

Brent Tillman -- D.A. Davidson -- Analyst

Okay, thanks for the color. Obviously, we see what's going on with steel and copper market out there. It sounds like you guys are getting ahead of it. The one question I had was any issues just getting the materials and components you need? It seems like there's a lot of supply chain challenges around the industry.

Gary Fields -- President & Chief Executive Officer

It's an interesting conversation. The Board met for our audit committee meeting a couple of days ago and every one of our Board Members was present, even though they're not all on that committee, they still read into it. There was a discussion about our inventory levels. Our inventory is running about 15% to 17% of revenue and if you look back historically, it was closer to 10% of revenue. They said, do we see a time when we might lower that inventory level and get back into that historic ratio and I said, gentlemen and ladies, we're blessed that we have this inventory. Because it's keeping us from having supply chain issues. We have an abundance of materials in here. We struggle for some small things from time to time, but my purchasing department says that while it's a little extra work, they've not caused us to miss any shipments or commitments for shipments because of that. This was kind of a blessing in disguise that we had this.

The other thing is, is that my pricing was more stable. Because we had a lot of these materials bought at a better price, so as things are escalating, one thing you're proud of as you got a big inventory of lower priced materials. I was able to get my price increase extended out further, June 1st, and I won't be buying materials at that higher price until after that price increase actually hits the floor. So, we're in real good shape with supply chain. I'm very proud of this team that we have here and how aggressive they are in doing that. For us, at this point in time at least, it has not been an issue.

Brent Tillman -- D.A. Davidson -- Analyst

Yeah. Very good. Last one from me would just be, Gary, when they can come back to the synopsis of what you're seeing out there in the market and it seems to be a true reacceleration in orders. I guess as we sit here today, I mean, it looks like go through 2Q, 3Q, we should see some favorable topline comparisons based on what you can see right now?

Gary Fields -- President & Chief Executive Officer

Yes. Q4 is coming somewhat into focus, now it's still just a little fuzzy. It's out there far enough that it's just a little fuzzy, so I don't want to absolutely commit that Q4 is not going to rollover on us. But again, Q4 of 20 was substantially lower. It kind of resumed that Bell's curve that we've had in the past. It was much lower than Q3. I don't remember the exact numbers now. You remember what the percentage reduction was? Anyhow, we're going to have favorable comps going forward. This Q1 was anticipated to be lower. It's very tough comp with Q1 of 20, because we had such a huge backlog coming into 20 and we knew this was going to be tough. We told you folks about it last quarter or even before that. Going forward, I think, we'll have some favorable comps, Brent.

Brent Tillman -- D.A. Davidson -- Analyst

Okay. Well, very good. Best of luck here in this quarter.

Gary Fields -- President & Chief Executive Officer

Thank you.

Operator

We have our next question from Julio Romero from Sidoti. Your line is open.

Gary Fields -- President & Chief Executive Officer

Good afternoon, Julio.

Julio Romero -- Sidoti & Company -- Analyst

Hey, good afternoon, Gary. Good afternoon, Rebecca.

Rebecca Thompson -- Chief Accounting Officer & Treasurer

Good afternoon.

Julio Romero -- Sidoti & Company -- Analyst

I guess just on that last question, want to just kind of stay on price cost and just thinking about price increases. Can you give us a refresher of maybe how often you reprice in a given year and do you think it's more likely than not that we see a few more price increases in the third and fourth quarter?

Gary Fields -- President & Chief Executive Officer

Well, our purchasing group keeps a 6-month forecast of material cost in front of me at all times. So, I have a rolling 6 months in front of me at all times. Again, going back to that higher inventory level that's what allowed me to have a good visual on 6 months out. I can respond quick enough that I can give our sales channel partners very good notice, so that they don't get trapped with bids at a price that they can't afford due to a price increase. Knowing the cadence, all those years I spent on their side of the table, I know of their activity from bid day until they place an order with us. So, I try and keep that in mind and then with our lead times now under very good control, I know exactly how long it takes to get from the date we book an order at the new price to get it on the plant floor and all of that is inside of the 6 months. So, every month, I'm looking at the 6-month outlook on these material cost. If there is any change within the month, then they raise the flag quicker, but otherwise, our normal activity is once a month. They furnish me an updated report that gives me the next 6 months. It's a calculus is to how we do this and knowing all of the timing events. Then we have this so that we can do it.

What I have as of today, doesn't give me any indication for the next 6 months that I would have another price increase. I have the one coming June 1st that covers everything that I know for the next 6 months plus. Because we announced that 2 to 3 months ago at the beginning March, a couple of months ago, that we announced that and so now I've got, let's say, 8 months runway that things are stable. There's been no changes in our outlook for the last 2 months. Everything that I got on this latest report was captured the same 2 months ago. To your point, could we see other price increases? As of today, I don't see the necessity for that, but this could easily change if we have another big vessel lodged in the Suez Canal and can't get something here. I mean, all kinds of things could happen quickly, but what I'm most proud about this team is that they now have very, very good data points that they utilize to provide the calculus for a necessity for a price increase. Hopefully, that answers your question.

Julio Romero -- Sidoti & Company -- Analyst

It does and I appreciate the color. Hopefully, we don't see another blockage in the Suez Canal. But you're right, anything like that could happen. One other thing you mentioned I think is you called out K through 12 is something that you're seeing picking up on the new construction side. What about on the replacement side, is that something that should pick up in the summer time? Some of the schools are out of session and are you seeing that in your bookings at this point in time?

Gary Fields -- President & Chief Executive Officer

We are, so K through 12, historically for us has been about 50% planned replace and 50% new. A lot of these bond issues, that we are beneficiary of, they will do some wing additions to schools to expand the school itself. They'd do some updating modernization of some existing schools and then they usually throw in building 2 or 3 new schools. We got an order and we're really thrilled with this. This particular school district has now been purchasing equipment from us on an annual basis for 13 years straight. They're in North Texas. They purchased 811 units to be installed in '21 and this time, they were about 70% replacement and 30% new construction and that's why I am saying, it looks like our replacement is a bit higher than our new construction ratio that we were historically seeing.

That's only one school district, but I've seen a multitude of others and I was made aware at this sales conference last week of numerous school districts that had bond issues from last fall until as recently as 2 weeks ago out to the voters and all of these are being unanimously approved and the format of a lot of these bond issues is more replacement than new construction. I think that favorability of our equipment for that kind of end user is well recognized. I believe that our percentage of replacement business versus new construction will continue to grow on the replacement side, even though this new construction market might be somewhat depressed. We're going to do real well with this replacement. We're already doing real well with it.

Julio Romero -- Sidoti & Company -- Analyst

Got it. I guess you talked about you expected sequentially next quarter's gross margins to be closer to the mid-point of your 28% to 32% targeted range, is that all kind of related to volume absorption or is there any sales mix component?

Gary Fields -- President & Chief Executive Officer

It's mostly absorption, Julio. It's mostly absorption. I mean you've got depreciation and things that are fixed cost. There're so many fixed cost that now our run rate, as we've added all of this production capability, it comes with a penalty called depreciation and we just put that new building in service in Longview. That one's hitting us pretty good on that line and we're yet to recognize the revenue from that new building that it's capable of. Now, I will say that the revenue from the Longview manufacturing has continued to grow as a result of the new building and as a result of the efficiency gains that this traveling team from Tulsa has been able to help collaborate with them on. Their latest monthly revenue numbers are up, they've had a 21% increase in revenue as a result of the improvement in technique and the improvement of the new building. That's what we've recognized already, 21% over the best month that they never had prior to these things occurring. We believe that there is a whole lot more to be had.

Bear in mind, we put over 100% more physical capability in place. You've got to get the people, you got to get them trained, you've got to get them to a level of efficiency, and that's why I say, it will take all year long to even approach what we dream is possible there, what we actually know is possible because of how we've done it before.

Julio Romero -- Sidoti & Company -- Analyst

Got it. Then just last question for me here is just on the SG&A is up as a percentage of sales, which was expected. I think you called that out on the fourth quarter call, but is that kind of 150, 160 basis point or so increase representative of what we should expect throughout the year?

Gary Fields -- President & Chief Executive Officer

Well, bear in mind that it could be higher actual dollar number and will be because of profit sharing, because that's in SG&A and recognized that in Q1. We just issued profit sharing announcement yesterday and it was lower than any quarter in 2020 and so we're looking for a comparable, favorable Q2 versus 20 favorable and should that occur, then the actual dollar spend on SG&A will be higher. Now, as a percent of revenue and I haven't done the math on that.

Rebecca Thompson -- Chief Accounting Officer & Treasurer

Yeah, I mean, I do think, it'll be up a little, mainly driven by our insurance premiums. Since those went up $2 million year-over-year. So that will be a driver of our SG&A. Then also looking forward into the second half of the year as the country opens back up, we anticipate our selling expenses in our travel will increase as well.

Gary Fields -- President & Chief Executive Officer

I'm proud to say, Rebecca, it's already started. Because I've had 3 major customer visits this week and I have one more today. We haven't had 3 customer visits in one week in over a year and these people are coming in 6, 8, 10 at a time and of course, we put them in hotels. We take them to dinner and there's expense with that. On top of the fact that we just had this sales retreat last week, we weren't able to have one in 2020, we had to cancel it.

Rebecca Thompson -- Chief Accounting Officer & Treasurer

Right. Sales expenses in 2020 were extremely low, just because we didn't have any of the normal activity that we will this year.

Julio Romero -- Sidoti & Company -- Analyst

Makes sense. Appreciate the color and thanks for taking the questions.

Operator

We have our next question from Jon Braatz from Kansas City Capital.

Jon Braatz -- Kansas City Capital -- Analyst

Good afternoon, Gary, Rebecca. A question, Gary, on the water source heat pump, when you started with the water source heat pump, the thought was that you're getting into a market it's maybe up to $500 million or something like that and the hope was to really take some share of that and I think last year, we did about $20 million in revenues in the water source heat pump. Where do you stand today in terms of market opportunity, market potential of the water source heat pump? It just hasn't been fulfilling the expectations that we had earlier, but where do you stand at this time in terms of what's possible?

Gary Fields -- President & Chief Executive Officer

Well, I haven't seen a summary of what today's current market dollar volume is. The number of units on AHRI are down a few percentage points. So, the dollars, have to be down too. Our number of units has been pretty steady. In fact, just the last month or two, it's grown just a bit and so we had validated a little over a 5% market share last year and I believe we're holding steady at 5 plus now and could be breaking through 6%. I won't see the final numbers on that for a few more days, but it's still in that mid-single digit range. It's not the 20% that we believed we were capable of obtaining. Our biggest miss on that business was our marketing intelligence was what people want and everyone we were listening to was expert in new construction and our sales channel just was not expert in replacement. We positioned this product very well for new construction, it's very much appreciated. We've had that steady business. It grew at a very brisk pace at one time. Then kind of leveled out and then the new construction market itself went down. For us, to stay steady, tells me we're getting an even higher percentage of the new construction business.

However, this replacement market, our sales channel partners were not well attuned to that market and so we've put in several support services to help them with that. We've hired 3 people in the last couple of years, 2 of them in the last year, they are expert in the aftermarket business. That's what their whole career has been. They're people I've known most of my career and have great respect for them. Bringing those resources and to help the sales channel partners develop this, all the sales channel partners are with very little exception are dedicated to an aftermarket strategy and they are putting their resources behind this and so I believe that when our new product that is designed with the aftermarket in mind, the replacement market, when we get that product introduced to them, I believe, will resume growth and we'll catch up relatively quickly to the expectations.

Again, we made a mistake there. We admit that mistake. I'll tell you, there is no sin in my book for making mistakes. There is a sin in my book of substantial note of not admitting them and not correcting them. While we've admitted the mistake, we've corrected the mistake and we're on the cusp of introducing that correction and seeing exactly how well that performs.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. With those changes, that correction, do you think as you look back at 20% market penetration, do you think that's still a reasonable possibility?

Gary Fields -- President & Chief Executive Officer

It's absolutely reasonable. There is nothing changed in my mind on that. The reason is that the sales channel partners, the commitment they've made and the success that they've had thus far, tells me that it's very much in our grasp.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. Then the timeline, when do you think we might see some evidence of those gains?

Gary Fields -- President & Chief Executive Officer

We're not anticipating having a material impact on the number of units going out the door until Q4. That might even be just a little early to be very optimistic about. The new product will be available on Q4. There are a lot of them that have said that they want to have an immediate stock in their inventory of that product, because they think that's a good investment for them. So, we would very likely be building units that we sell to them. We don't inventory of them ourselves. We sell those units to them. We could be filling their stock in Q4 and that's why I think there is a good opportunity to increase our number of units substantially and then there could be a little low because they stopped all their warehouses and then they've got to go out there and get their momentum going. So, it could be that we have a kind of the in-rush Q4, a little bit of a low Q1, and then we resume a good steady pace of business Q2 next year. If we look at the year 2022 in whole, then we can look for some good solid double-digit percentages of growth like what we had the first 2 or 3 years that we were in this business. I mean the first 3 years, we were like a 100% growth year-over-year and then 77% and 57% and so we've seen how we can do that and we can supply that

A major difference now Joh, is a lot of our early on time was learning how to use this manufacturing facility. So, now we've got a few years of using it. This product is a different configuration, but it's not a different manufacturing process.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. When you look at it, I don't know if you can look at it in isolation, is up until this point is the water source heat pump paying its way?

Gary Fields -- President & Chief Executive Officer

No. That'll be foolish to say it was. When I look at it, no, it's not paying its way yet. I mean it is profitable, it's not a loser. But it is not at benchmark margins. Because we don't have the volume to offset the depreciation cost and the fixed cost of that facility. If we were to double the volume, we would triple the percentage of net profit. Because a lot of that profit comes at no additional fixed cost expense. So, we have to double that volume to get these things close to benchmark margin levels. The good thing about it now is even though the margin percentage is lower. It's not that big of a volume to where it's that big of a burden.

The other thing that I'll point out is when I came here, I had 30 years of experience in the sales channel. I've been selling AAON since 1990 and I did a pretty good job of it and so did my company, but because we were so mature with our presentation of AAON equipment in the markets that I really could visualize what the growth potential for those legacy products was in reference to my experience in my company.

While as I began consulting for AAON, I began to realize that substantial number of the sales channel partners were nowhere near that mature in their markets. But I didn't know exactly how that was going to come along and it's come along very nicely. My efforts in consulting back there in 13 to early16, those have all manifest themselves. The changes that I've made in the sales channel since I came on board here, the first of 16, those manifested themselves.

When I first came here, we had 6 regions and the different performance versus expectations was the lowest region was only reaching 65% of expectations. The highest region was about 5% over expectations. Today, the range runs from 122% of expectations to 129% of expectations at this point in time. It is very much, very uniformed effort and results across all of North America right now. This sales channel improvement that we have been working on going all the way back. I mean, Norm worked on it before me but I put my effort into it, starting in 2013. I mean it has paid off.

We have a good uniformed performing group across North America and by the way, every one of them is growing.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. That's it, Gary. Thank you very much.

Gary Fields -- President & Chief Executive Officer

Thank you, Jon.

Operator

[Operator Instructions]

Duration: 53 minutes

Call participants:

Gary Fields -- President & Chief Executive Officer

Rebecca Thompson -- Chief Accounting Officer & Treasurer

Brent Tillman -- D.A. Davidson -- Analyst

Julio Romero -- Sidoti & Company -- Analyst

Jon Braatz -- Kansas City Capital -- Analyst

More AAON analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.